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Explainer-Scotland’s “kilt” bonds – how might the debt plan work?

by Jessica Weisman-Pitts
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Explainer-Scotland’s “kilt” bonds – how might the debt plan work?

LONDON (Reuters) – Scotland’s pro-independence government plans to sell bonds in international debt markets for the first time, saying the move would show investors that the country has the credibility among investors to eventually break away from the United Kingdom.

The head of the devolved government Humza Yousaf said on Tuesday the first sale of Scottish bonds – dubbed “kilts” in a play on gilts, as British government bonds are known – would take place by the end of the current parliament due in May 2026.

Yousaf told the annual conference of the Scottish National Party that the money would be used to fund infrastructure projects. He did not say how much the bond sales might raise although the sums are likely to be relatively small.


Scotland has had powers to sell bonds since 2015 but has so far not used them.

The Scottish government will need to set out the legal terms for the sales plans as a first step.

It will then probably seek a credit rating from ratings firms such as Fitch, Moody’s or Standard & Poor’s to help investors gauge the level of risk in buying Scottish bonds.

Unlike U.S. states and cities, or regions in parts of mainland Europe, British cities and administrations in Scotland, Wales and Northern Ireland have very limited independent powers of taxation and do not issue tradable bonds.

Britain’s finance ministry has been unwilling to approve bond issuance by other authorities due to concerns that taxpayers across the United Kingdom might have to bailout cities and regions that default.


Governments selling debt pay a level of interest to investors that reflects how markets assess the risk of a future default, on top of other factors.

Scotland’s risk premium will be less expensive if its planned bonds are backed by the British government which has a track record in markets going back centuries.

Mairi Spowage, director of the Fraser of Allander Institute at University of Strathclyde, told BBC radio she believed the UK finance ministry would be the ultimate guarantor of the debt under legislation which sets out Scotland’s relationship with the UK.

Russ Mould, investment director at investment firm AJ Bell, said investors would weigh up the potential risk of a breakaway by Scotland from the United Kingdom, as sought by the SNP, including the possibility of Scotland adopting the euro if it did gain independence.

“I’d assume people would look for a fairly hefty premium to the UK 10-year (gilt) to account for all the known unknowns,” Mould said.


Scotland currently borrows from the UK National Loans Fund (NLF), the British government’s borrowing and lending account.

Currently 75% of Scotland’s cumulative 3 billion-pound cap for capital borrowing has been used, Spowage said. That would leave around 750 million pounds for further debt, either via the sales of bonds or as loans from the NLF which were likely to have more favourable terms, she said.

To put that into context, Britain is set to borrow about 240 billion pounds in the 2023/24 financial year via gilt sales.


(Reporting by William Schomberg and Naomi Rovnick; Editing by David Milliken and Toby Chopra)